Outsourcing Contracts Are Expiring Rapidly

With outsourcing contracts expiring at a record rate, many organizations are looking to renegotiate terms to reflect changing business conditions.

By Samuel Greengard

Over the last decade, IT outsourcing (ITO) has evolved from a niche tool to a mainstream strategy. A growing number of organizations are turning to service providers to offload an array of tasks, including infrastructure management, data storage and software development.

However, a new study conducted by market intelligence firm ISG Research indicates that a record number of outsourcing contracts are now expiring, and businesses are increasingly weighing their options and shopping for new or renegotiated contracts. A record 901 outsourcing contracts expired in 2012, an increase of 27 percent from the previous year, according to ISG. Expiring contracts were valued collectively at $25 billion in 2012.

In addition, a total of 886 active contracts valued collectively at $21.2 billion are set to expire in 2013. The issue cuts across the entire spectrum of the business world. There are eight different vertical industries with at least $1 billion in expiring contract value, as well as 32 individual contracts worth $250 million or more due to expire, ISG reports.

The upshot? "The outsourcing market is seeing a markedly higher volume of contracts with shorter timeframes, so contracts are expiring more rapidly than in the past," says Paul Reynolds, director and chief research officer at Momentum, a division of ISG. "This is not a one-time phenomenon. Contract expirations reached an all-time high in 2012, and all signs indicate this trend continuing throughout this year."

A couple of other key factors are also influencing the marketplace, he adds. Many organizations are approaching service providers and inquiring about renegotiating contracts midway through the period in order to take advantage of short-term cost savings. Businesses are also more willing to take a number of tasks from an incumbent provider and award them to best-of-breed providers, further fueling the number of contracts in the market.

The implications of the changing marketplace are significant, Reynolds says. "Multi-sourcing poses challenges for both sides. For clients, it's finding the right service providers and the right mix of providers, and then managing the mix so everything works together effectively. For providers, it's ensuring that clients are aware of their capabilities so that they can compete in an increasingly crowded market in which clients are not shy about switching vendors."

Reynolds suggests that IT organization think through choices carefully before adopting a strategy. "Multi-sourcing has potential benefits that are significant, but managing a team of providers in a complex operation is easier said than done," he notes.

A common stumbling block to multi-sourcing success is a lack of accountability and ownership across provider teams. "Ironically, this means that unless specific measures are put in place, multi-sourcing can negatively influence operational effectiveness and erode its benefits," he adds.

Finally, "Clients need to make sure they're not missing a specialist that can offer the solution they need," Reynolds explains. "Communication is key, and project managers must track resource requirements to ensure that critical jobs have the staffing and priority that's needed. Otherwise, lower priority initiatives wind up absorbing time and talent."